Mortgages: A Key Element of the Bubble Leading to the Financial Crisis of 2007-2008

Mortgages. Simply stated, they are essentially an extremely large loan to individuals so that they may purchase housing. How could these seemingly basic financial products be blamed in the media for the financial crisis of 2007-2008? 

The answer lies not only  in the rapid increase outstanding mortgages, but also in the types of mortgages that were created in this period - many of which went to unworthy or "subprime" borrowers.  More importantly, however, was the fact that these risky mortgages were pooled together as investment products that linked the entire financial system together for a dangerous level of systemic risk. However, an understanding of why these mortgages were created and what made these mortgages risky is needed to understand their consequences in the financial system.

Government programs, in an effort to increase home ownership in underserved areas, encouraged the rapid proliferation of mortgages across the United States by offering incentives for banks to lower their lending standards. As such, banks created different types of mortgages such as "Adjustable Rate" or "Jumbo" mortgages to entice those borrowers who might not have been eligible to borrow in the first place. As a result, vast amounts of mortgages were originated, and an environment for an asset bubble was born. Once this bubble popped, the government attempted to restore this market with First Time Home Buyer Programs. Please click on the links to the left to learn more about how mortgages played a role in the financial crisis.